The way to bet on the dollar

LEADERS of the richest nations, the G7, meet on Friday in Boca Raton, Florida, to discuss with the Bush administration what, if anything, should be done about the decline in the dollar.

The Europeans have long since got over any feelings of euphoria they may have had as the euro rose in the foreign exchange markets, and they are now concerned it will make export-led recovery significantly harder. Their best hope, therefore, is for an agreement with the Americans on concerted intervention to turn the tide.

They hark back nostalgically almost 20 years to when the Plaza Accord - named after the New York hotel where the leaders met - set the stage for one of the most successful central bank interventions ever.

That was then and now is now, and you do not have to be a sceptic to think the Europeans are likely to come away empty-handed. That is what happens to Bush's opponents in Florida even if they seem to have right on their side. It is not a place where Bush experiences defeat.

The brutal facts are that the sinking dollar suits the American administration in the short term because in this election year it allows it to continue with the rake's progress that passes for an economic policy and shields American voters from the consequences of their own profligacy.

The weakening dollar is, to use the well-worn phrase, America's currency but Europe's problem. The way to bet, therefore, is to assume the status quo will continue. Bluntly, this means the world's two most powerful economic blocs will continue separately to pursue dysfunctional economic policies.

America will continue with massive deficits, peppercorn interest rates and a sinking dollar regardless of the consequences in terms of debt and a likely revival of inflationary pressure.

The Europeans, convinced that US policy will hit the buffers next year, will still lean too far the other way with high interest rates directed against a non-existent inflationary threat when what they should be concerned about is economic stagnation.

But markets do not need central bank intervention to change their direction - indeed, central banks only have real power if they successfully call the turn and go with the grain of markets. One does wonder, however, if the dollar is about to turn of its own accord.

It is always high-risk to call the direction of any currency - indeed US Federal Reserve chairman Alan Greenspan famously remarked that no economic model for forecasting interest rate movements worked better than tossing a coin.

That said, sterling is now absurdly generously priced against the dollar and, on the basis that it is always a good idea to leave 10% for the next man, it is surely time for people to start taking profits. That is even more the case with the dollar against the euro.

Whatever the failings of American economic policy, the swing in the value of the dollar in terms of relative purchasing power against other currencies has gone far enough and ought soon to begin to correct.

That, too, should be the way to bet.

Right Course

PORTS ARE the sharp end of world trade growth. Containers are the boom-or-bust bit of it.

Ports operate at the monopoly end of the business, meaning that even in slow times there is normally enough throughput to turn a profit. Container shipping behaves like a commodity - a great business when the shipping lanes are full but prone to ferocious price-cutting, intense competition and painful losses in the periodic slowdowns.

Containers are currently enjoying one of their better periods and it makes sense, therefore, for P&O to seize the chance to get some of its money out of P&O Nedlloyd, its container joint venture, and use the capital to accelerate the expansion of its interests in ports.

The same logic - the more effective use of capital - is used to explain the cut in the dividend, and would further imply that the 25% residual stake in the container business might be sold at some appropriate point in the future, as probably will some of the real estate business.

Meanwhile, today's deal is an elegant solution that sees Royal P&O Nedlloyd floated as a separately quoted container company with the independence that should allow it to flourish.

As such, it is as significant as the highly successful demerger of the P&O cruise business a couple of years ago, where loyal shareholders now have an investment the combined value of which is in excess of £10 a share - its highest-ever price. Let us hope this deal is similarly successful.